The present invention is in the field of finance, economics, math, and business statistics, and relates to the modeling and valuation of financial options, exotic options, employee stock options, and strategic real options. A financial option is a contract that can be purchased and sold in the open financial market, and provides the holder the right but not the obligation to perform some action in the future. For instance, an American financial call option allows the holder the ability to “call” or purchase a stock at some prespecified strike price within some time period up to and including its contractual maturity, allowing the holder the ability to cash in a profit should the prevailing market price of the stock exceeds this strike price (i.e., the call option holder executes the option and purchases the stock at the contractual strike price and sells it in the market at a higher price, returning a profit). A put option allows the holder to sell the stock at some prespecified strike price in the future, benefitting from a drop in the stock price. The field of options analysis and valuation is important to many traders, investment analysts, banks and even corporations who issue them, from basic financial options like calls and puts that are sold on stock exchanges around the world, to more exotic options instruments that are financially engineered with very specific conditions (e.g., the option is paid only if the Standard and Poor's 500 returns in excess of a certain percentage, or the company's profitability exceeds a set of graduated thresholds or barriers, stocks or other assets are provided instead of cash, multiple asset based options, and so forth), employee stock options (options that are granted to employees based on rank, performance, tenure, or other criteria, and these options may have firm-specific performance requirement covenants that may be unique for different firms) that have blackout and vesting requirements coupled with other exotic vesting conditions, and strategic real options (where companies often times have strategic flexibility to take corrective actions [exit options], explore a different strategy [switching options], make midcourse corrections [chooser options], explore other options, phase its investments into different stage-gate options [sequential compound options], the ability to sell off and abandon its assets [abandonment options], expanding its operations [expansion options], create a joint venture or alliance [execution options], outsourcing [contraction options], combinations of these, and many others). All of these option types need to be valued and traditional approaches rely on advanced mathematics that are neither pragmatic to the average corporate analyst and investor nor flexible enough to capture these exotic elements in real-life situations.
The present invention uses an option valuation methodology called lattices, which is a family of techniques comprising binomial lattices, trinomial lattices, quadranomial lattices, pentanomial lattices, and other multinomial lattices. These names imply how many potential outcomes each state or condition will create in the future (e.g., binomial means there are two states, where the value of the project, asset or investment can either go up or go down in value, whereas a trinomial models three states, and so forth). These models are static in nature. In this present invention, enclosed in its preferred embodiment as the Real Options Super Lattice Solver (SLS) software system, allows each of these lattices to be fully flexible and customizable. This method allows the user to properly model all of the exotic elements that exist in real-life. For instance, options that have strike prices that change over time, options based on underlying stocks that have shifting or changing risks over time (measured by the volatility of the stock), special and exotic covenants and requirements included in the option (vesting or cooling off or blackout periods during which the option cannot be traded, the option is live only if the stock price or some other benchmark asset breaches or does not breach a prespecified price barrier, and combinations of many others elements that can be engineered). Therefore, due to the infinite combinations of possibilities these exotic options can take, this invention provides a new and novel method that allows the user to customize and engineer its own option and to value it, making this method useful and applicable in valuing all types of options (financial, exotic, employee, or strategic real options).
The related art is represented by the following references of interest.
U.S. Pat. No. 6,709,330 issued to Cynthia Ann Klein, et al on Mar. 23, 2004 describes a method of stock options trading techniques, in identifying options trading strategies, creating an option trading game presumably for a university course, and the game has the ability to track how much a player has won or lost in the stock trades. It also randomly creates news, events and rumors in the market and gauges the game player's response to these news and rumors, generating fake data and a fake market situation, and creating an environment akin to the real-life floor brokers on Wall Street to buy and sell certain instruments. The claims in the present invention application is different as we apply options theory to real options or for real physical assets and valuation of options as it pertains to corporate decisions and does not generate a fake market and trading system. Finally, the Klein application does not suggest the method of using a customizable lattice methodology to perform quantitative real options valuation for the purposes of making strategic business and corporate investment decisions.
U.S. Pat. No. US 2001/0034686 A1 to Jeff Scott Eder on Oct. 25, 2001 describes the use of a Black-Scholes model to perform its options calculations, where the Black-Scholes equation is a known model with a known equation and the result generated is static. It is used to perform a valuation of a company for the purposes of accounting entry, used by appraisers and certified public accountants, accounting for the assets and contingent liabilities (the amounts owned and owed by the company) to determine the net value of the firm. The Eder application uses the general accounting ledger system, an operations management system (to track production rates, production teams and other operational issues), a human resource system (bundled with SAP, Oracle and other large scale systems), supply chain management, filled with search routines and software “bots” to look for patterns in the existing dataset, clustering and grouping different types of data, and computes the company's real option value. The use of the term real options value in the Eder application is as a value per se, and not as a methodology. In addition, the Eder application refers to real options value as the value of the firm after accounting for these assets and contingent liabilities. The claims in the present invention is different because it does not use the Black-Scholes method per se, but applies different advanced analytics such as the binomial, trinomial, quadranomial and pentanomial lattices approach and these lattices have the ability to be completely customizable to suit the user's specific business conditions and situation and can take any sets of inputs. The Eder application does not suggest the method of using a customizable lattice methodology to perform quantitative real options valuation.
U.S. Pat. No. US 2001/0041995 A1 issued to Jeff Scott Eder on Nov. 15, 2001 describes—the use of a Markov Chain Monte Carlo model and the Black-Scholes method for option valuation. In addition, the Eder application is used for accounting purposes and for accounting recording and reporting applications. It is also used for business management purposes such as looking at assets and liabilities and accounting metrics of the company, generating performance indicators such as metrics (e.g., net present value or return on investment, et cetera), and accounting for items such as brand name, partner and supplier relationships, employee and customer relationships and so forth, all of the things which are not considered and not modeled or used in the present invention. The Eder application does not suggest the method of using a customizable lattice methodology to perform quantitative real options valuation as described in this present invention's claims.
U.S. Pat. No. US 2004/0083153 A1, issued on Apr. 29, 2004 to John Larsen, et al describes some options valuation approaches using simulation alone to obtain the required results, which is different from the present invention of using customizable lattices. In addition, the Larsen invention is used for generating business cases to decide if a certain product or project should be purchased, with a budget and accounting review process, enterprise alignment review, interdepartmental review, and a multitude of qualitative aspects such as intangible impacts, strategic impact, qualitative questions to the users, confidence questions, and other qualitative factors. The claims of the present invention application are different as it uses customizable lattice valuation methods and the use of strictly quantitative inputs. The Larsen application does not suggest the method of using a customizable lattice methodology to perform quantitative real options valuation.
U.S. Pat. No. US 2004/0103052 A1, issued on May 27, 2004 to Gil R. Eapen, describes the use of only Monte Carlo simulation to perform the required computations. The application only approximates value of the option and does not suggest an exact approach to obtain these values, as simulation is only an approximation approach and does not provide an exact result. The Eapen application is irrelevant to the current application's claims as it does not suggest the method of using a customizable lattice methodology to perform quantitative real options valuation.
U.S. Pat. No. US 2004/0138897 A1, issued on Jul. 15, 2004 to Gil R. Eapen, describes the use of Monte Carlo simulation and portfolio analysis to perform the options computations. In addition, the application looks at putting in trial portfolios by randomly selecting projects to add to the portfolio, deleting this project and replacing with other projects. The application only approximates value of the option and does not suggest an exact approach to obtain these values, as simulation is only an approximation approach and does not provide an exact result. The Eapen application is irrelevant to the current application's claims as it does not suggest the method of using a customizable lattice methodology to perform quantitative real options valuation.